THE RISE OF EMERGING MARKETS: PROSPECTS FOR GLOBAL FINANCIAL GOVERNANCE Conference on Emerging Economies in Globalized Financial Markets Halle, Germany, 21 and 22 June, 2012 Peter Draper Senior Research Fellow South African Institute of International Affairs

OVERVIEW • How much economic power has shifted to emerging

markets? • A ‘New Economic Geography’? • And with what implications for global financial

governance?

How much economic power has shifted to emerging markets? •  Three key prisms: trade, investment, finance •  Trade:

•  Rapid growth of south-south trade •  But aggregate figures conceal role of multinational corporations

and associated global value chains •  Accompanied by rapid growth of intermediate goods trade •  Nonetheless rise of southern multinationals reinforces the point that

a degree of re-ordering is taking place •  Growing importance of state-owned enterprises in energy and

finance sectors (SWFs) in particular

Growth of south-south trade Share emerging and developing countries in world exports

0

510

1520

25

3035

4045

50

High-technology

Medium-technology

Low-technology

ResourceBased

Primaryproducts

Total Totalmanufactures

Sha

re w

orld

trad

e

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Ann

ual g

row

th r

ate

Share 2000 Share 2008

World growth rate Emerging & developing growth rate

Source: Edwards and Lawrence (2011). Authors’ calculations using UN Comtrade data for 142 countries for which trade data are available for both 2000 and 2008. Technology classification is based on Lall (2000). Primary products (PP) and resource-based manufactures (RB) tend to be unskilled-labour- and scale-intensive, and skill requirements tend to rise with the degree of technological complexity

MNCs: Rethinking Bilateral Trade Balances

Intermediates trade: proximity to one of the triad economies matters

How much economic power has shifted to emerging markets? •  Investment:

•  Southern OFDI is increasing as a proportion of global FDI •  But it is concentrated in relatively few emerging markets •  And OFDI is still dominated by developed countries •  Reflecting their ongoing centrality to global value chains

•  Finance? The subject of your discussions over the next few days!

Sources of FDI

7-8

2

Global FDI outflows rose in 2011...

Figure 1. FDI outflow shares by major economic groupings, 2000–2011

0

25

50

75

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Developed economies

Developing and transition economies

Source

FDI Outflows by major region, 2000-2011, Percentage

7-9

Sources of FDI

       

CHAPTER I Global Investment Trends 9

Figure I.9. Global FDI out!ows, top 20 home economies, 2009 and 2010a

(Billions of dollars)

Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/fdistatistics).a Ranked on the basis of the magnitude of 2010 FDI outflows.Note: The number in bracket after the name of the country refers to the ranking in 2009. British

Virgin Islands, which ranked 16th in 2010, is excluded from the list.

16

27

19

17

18

21

10

16

26

27

42

44

75

33

57

64

103

78

15

18

18

19

20

21

22

26

30

32

38

39

52

56

58

68

76

84

105

0 50 100 150 200

India (21)

Ireland (13)

Luxembourg (17)

Korea, Republic of (19)

Singapore (18)

Italy (16)

Spain (23)

Australia (20)

Sweden (14)

Netherlands (12)

Belgium (156)

Canada (9)

Russian Federation (8)

Japan (4)

Switzerland (10)

China (6)

Hong Kong, China (5)

France (2)

Germany (3)

United States (1) 329283

20102009

Figure I.10. Sectoral distribution of FDI projects,a 2009–2010

(Billions of dollars and per cent)

Source: UNCTAD.a Comprises cross-border M&As and greenfield investments.

The latter refers to the estimated amounts of capital investment.

554

361

449392

254

338

0

100

200

300

400

500

600

Primary Manufacturing Services

2009 2010

37% 48%30% 22% 33% 30%

automobiles, recovered in 2010. The pharmaceutical industry, for example, remained attractive to foreign investment, thanks to the dynamism of its !nal markets – especially in emerging economies.

This rests, !rst, on the necessity of setting up or acquiring production facilities, as the patent protection for a number of major drugs marketed by global pharmaceutical !rms is about to expire, and secondly on the ageing demography of most developed countries. Restructuring continued in 2010, as witnessed by two large deals that took place in the industry.3 Opportunities for business deals exist due to rapid growth in the number of scientists and pharmaceutical !rms in emerging economies, most notably in China and India.

In food, beverages and tobacco the recovery was due to the sustained demand for basic items, especially in developing countries. For many large TNCs in this industry, pro!ts soared in 2010, and a number of large acquisitions were made.4 In the case of textiles and clothing, the recovery is prompted by a growth in consumer spending, particularly in some emerging countries. Garment production is fairly cost-sensitive, which may prompt accelerated

Destinations of FDI

7-10

   

CHAPTER I Global Investment Trends 3

Figure I.2. UNCTAD’s Global FDI Quarterly Index,a 2007 Q1–2011 Q1(Base 100: quarterly average of 2005)

Figure I.3. FDI in!ows, global and by group of economies, 1980–2010(Billions of dollars)

Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/fdistatistics).

Developing economies

Developed economies

Transition economies

0

500

1 000

1 500

2 000

2 500World total

52%

1980 1985 1990 1995 2000 2005 2010

a. Current trends

Global FDI in!ows in 2010 reached an estimated $1,244 billion ("gure I.1) – a small increase from 2009’s level of $1,185 billion. How-ever, there was an uneven pattern between regions

and also between subregions. FDI in!ows to devel-oped countries and transition economies contract-ed further in 2010. In contrast, those to developing economies recovered strongly, and together with transition economies – for the "rst time – surpassed the 50 per cent mark of global FDI !ows ("gure I.3).

FDI !ows to developing economies rose by 12 per cent (to $574 billion) in 2010, thanks to their relatively fast economic recovery, the strength of domestic demand, and burgeoning South–South !ows. The value of cross-border M&As into developing economies doubled due to attractive valuations of company assets, strong earnings growth and robust economic fundamentals (such as market growth).

As more international production moves to developing and transition economies, TNCs are increasingly investing in those countries to maintain cost-effectiveness and to remain competitive in the global production networks. This is now mirrored

The shift of FDI in!ows to developing and transition economies accelerated in

2010: for the "rst time, they absorbed more than

half of global FDI !ows.

0

50

100

150

200

250

300

350

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011

Source: UNCTAD.a The Global FDI Quarterly Index is based on quarterly data of FDI inflows for 87 countries, which

together account for roughly 90 per cent of global flows. The index has been calibrated such that the average of quarterly flows in 2005 is equivalent to 100.

Destinations of FDI

7-11

World Investment Report 2011: Non-Equity Modes of International Production and Development4

by a shift in international consumption, in the wake of which market-seeking FDI is also gaining ground.

This changing pattern of FDI in!ows is con"rmed also in the global ranking of the largest FDI recipients: in 2010, half of the top 20 host economies were from developing and transition economies, compared to seven in 2009 ("gure I.4). In addition, three developing economies ranked among the "ve largest FDI recipients in the world. While the United States and China maintained their top position, some European countries moved down in the ranking. Indonesia entered the top 20 for the "rst time.

The shift towards developing and transition economies in total FDI in!ows was also re!ected in a change in the ranking of host countries by UNCTAD’s Inward FDI Performance Index, which measures the amount of FDI that countries receive relative to the size of their economy (GDP). The index for developed countries as a group is below unity (the point where the country’s share in global

FDI !ows and the country’s share in global GDP are equal), and their ranking has fallen in the after-crisis period compared to the pre-crisis period of 2005–2007. In contrast, developing countries increased their performance index in the period 2005–2010, and they all have indices above unity ("gure I.5).

The rise of FDI to devel-oping countries hides signi"cant regional dif-ferences. Some of the poorest regions con-tinued to see declines in FDI !ows. In addition to least developed countries (LDCs), landlocked developing countries (LLDCs) and small island de-veloping States (SIDS) (chapter II), !ows to Africa continued to fall, as did those to South Asia. In contrast, major emerging regions, such as East and South-East Asia and Latin America experienced strong growth in FDI in!ows ("gure I.6).

FDI !ows to South, East and South-East Asia picked

Figure I.4. Global FDI in!ows, top 20 host economies, 2009 and 2010 a(Billions of dollars)

Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/fdistatistics).a Ranked on the basis of the magnitude of 2010 FDI inflows.Note: The number in bracket after the name of the country refers to the ranking in 2009. British

Virgin Islands, which ranked 12th in 2010, is excluded from the list.

153

5

13

15

30

21

9

36

26

32

26

34

15

36

71

38

26

24

52

95

13

15

19

20

23

25

25

26

28

32

34

39

41

46

46

48

62

69

106

0 20 40 60 80 100 120 140

Indonesia (43)

Chile (26)

Mexico (21)

Luxembourg (12)

Canada (18)

Spain (30)

India (8)

Ireland (14)

Saudi Arabia (11)

Australia (16)

France (10)

Singapore (22)

Russian Federation (7)

United Kingdom (3)

Germany (6)

Brazil (15)

Belgium (17)

Hong Kong, China (4)

China (2)

United States (1) 228

20102009

Slow growth of FDI !ows globally masks diverging trends between and within regions. Some of the poor-est regions continued to see declines.

A New Economic Geography? • Core economies: The “triad” (Ohmae)

•  United States •  European Union •  Japan? Ø  Key issue: Purveyors of globalization?

•  “BRICs” (Goldman Sachs) Ø  Key issues:

•  “Perspiration vs Inspiration”? (Krugman) •  “Decoupling”?

A New Economic Geography? • “Middle Powers”

• Newly industrialised countries (East Asian “tigers”) • Others (eg: South Africa; Mexico; Chile; Southeast Asia;

Australia; Gulf states; Israel) • A “graduating class”?

• Caribbean; Eastern Europe; South Asia; some African countries (eg Botswana; Ghana?)

• The “Bottom Billion” (Collier) • Most of sub-Saharan Africa and the Middle East • Central Asia • Others (eg: Pacific islands)

What implications for global financial governance? • Different interests means greater complexity in these

forums, eg: •  The BRICS and financial sector reforms

•  Brazilian finance is inconceivable without the BNDES, which constrains private capital market development

•  Russia is not an emerging market and sees its first point of reference as the G8

•  India’s financial sector is evolving fairly rapidly but has a long way to go

•  China’s financial sector is, and for the foreseeable future will be, characterised by repression linked to the currency peg

•  South Africa has the most developed financial sector of all but is not a BRIC!

What implications for global financial governance? • Uneven global economic participation therefore uneven

involvement in global economic governance forums •  Participation in the G20 •  IMF reform driven by GDP considerations •  Similarly FSB and other global supervisory agencies reflect the dominance

of economic size •  The alternative is ‘one country one vote’, but this has hardly been a recipe

for effectiveness in other multilateral forums such as the UN

What implications for global financial governance? •  A key question: is ‘the west’ prepared to yield its prerogatives?

•  The US/EU ‘stitch-up’ deal for the IMF and World Bank leaders’ positions suggests not

•  Therefore emerging markets will increasingly look to establish counterveiling mechanisms

•  The proposed BRICS Development Bank is one mooted response to this, but it is difficult to see how it could evolve

•  And it is not clear that the key emerging markets such as the BRICS are ready to take on leadership of the global economic system

Global Economic Governance?

What implications for global financial governance? •  Therefore the prognosis is one of increasing instability and lack of

leadership, or perhaps what Bremmer and Roubini call a ‘G0 world’ •  Not a happy prospect in a world of rapidly escalating financial

instability!